The path to energy security

Energy security is one of the hallmarks of success for any economy in the present times. The paucity of energy has haunted the economy of Pakistan for a decade now. Severe shortages and intermittent supplies have led the country into an energy dystopia.

After the enactment of the 18th Amendment, all four provinces have the right to use natural gas from their indigenous production. Sindh produces between 64 percent and 70 percent of gas produced in the country. Similarly, Balochistan and KP have sufficient reserves for their own use. Punjab, on the other hand, relies on the reserves of other provinces to meet its demand.

The 18th Amendment had put Punjab in a disadvantageous position as the demand has been far more than the supply. There hasn’t been a major discovery of gas reserves in the country for almost two decades now. The Petroleum Policy 2012 was quite conducive for exploration and production activities. However, the security situation and the unstable political landscape in the country have resulted in limited investment in this regard. This has led to a shortfall of natural gas.

An equilibrium in demand and supply is the cornerstone of long-term planning for any economy. Unfortunately, there wasn’t much number-crunching in the future demand and supply figures of natural gas during Musharraf’s regime. Instead, the rampant issuance of gas connections without augmenting infrastructure and supplies accentuated the energy crisis for the successive governments.

In 2010, the total injection of natural gas was 2,000 million cubic feet per day (MMCFD) in SNGPL’s network, which dropped to nearly 1,200 MMCFD in 2015 owing to the depletion of local reserves. The demand in domestic sector spikes 600 percent during winter, leaving no room for other sectors. Many sectors of the economy have depended on natural gas supplies that have drastically dwindled due to the depletion of local reserves.

The net effect was a drawdown in the industrial output, severe power outages, an increase in fertiliser imports and manufacturing costs, a reduction in exports, the further reliance on imported fuels, an imbalance in the trade deficit, lay-offs and an eventual malaise in the economy. It is estimated that the economy has suffered almost three percent annually in terms of GDP growth due to the paucity of energy.

The energonomists in the country had a fair inkling of the forthcoming energy crisis in the country. Liquefied Natural Gas (LNG) is a form of natural gas that is liquefied to such a point that the volume-to-mass ratio increases by 600 times, making it a transportable fuel. In 2006, the first LNG policy was introduced in the country. However, no practical steps were taken by the then government to make import arrangements.

In 2011, the LNG policy was revised during the PPP’s era. But the government lacked political credibility to import LNG. As a result, all LNG projects during the PPP’s era failed. The political parties knew very well that energy security is the only way to win over the electorate.

The ‘cold shutdown’ of nuclear power plants in Japan after the Fukushima catastrophe in 2011 had increased the demand for LNG. Japan heavily relied on LNG to energise its power plants, which scaled up the rates of LNG to a new high. The unprecedented increase in the LNG rates resulted in massive investments in all natural gas-producing countries.

The shale gas boom in the US further increased LNG production. The US, which had initially planned to import LNG, started converting its import terminals into export terminals in 2007. However, the drawdown in global crude oil prices further depressed the LNG rates. Many large economies, including Japan, South Korea, France, Italy, China and Singapore, are importing LNG to meet their local demand.

Pakistan floated its first LNG terminal tender in 2013, which was commissioned in a record time of nearly 11 months in early 2015. A fixed capacity charge was initially guaranteed by the government to the terminal operator in accordance with the best international practices in the trade. But the same charge has now been subjected to the levelisation of tariff over the course of 15 years, thereby causing no loss to the exchequer. The levelised re-gasification tariff is $0.47 for the first terminal, which is the lowest in the region for an unbundled project.

A tender for the second terminal was awarded at $0.42, which is expected to be commissioned by November 2017. Both the tenders were awarded on an open-competition basis and both the terminals have a re-gasification capacity of nearly 600 MMCFD. The intermittent supplies to the industrial sector – particularly in Punjab – have also improved significantly following more supplies from the functional LNG terminal.

The industrial sector’s problems have been partly assuaged by the LNG supplies. The three LNG-based power plants with an aggregate generation capacity of 3,600 MWs have also been partly commissioned this year. All three power plants have a rated efficiency of 62 percent – which is, by far, one of the highest in the world. The power tariff will certainly be reduced after the three power plants achieve their full capacity.

Securing base-load is the foremost essential element in the LNG supply chain without which economies of scale cannot be achieved. Inflated and redundant tariffs are a likely outcome of a failure to secure base-load. Qatar is the largest exporter of LNG in the world and caters to nearly 30 percent of world’s total LNG exports from its South Pars/North Dame Gas-Condensate field.

Qatar is known to have never missed even a single shipment since it started exporting the commodity nearly a decade ago. Supplies from a reliable supplier, such as Qatar Gas, was essential as the first LNG project in the country could not afford any breakdown in its supply chain.

LNG is being imported in Pakistan under two different arrangements. Initially, the government began negotiations under a government-to-government supply arrangement with the designated state LNG-exporting entity of Qatar – Qatar Gas – for a supply of 300 MMCFD. Simultaneously, open tenders were invited for a supply of 100 MMCFD volume of LNG. Both government-to-government and the open-competition contracts have been awarded at the same rate to suppliers.

The slope of the LNG for the first terminal is as low as 13.37 percent of Brent oil, which is even lower for the second terminal. According to a report published by IGU in 2016, the average LNG import price in Japan was $9.77/MMBTU in 2015. The average price in Pakistan has been lower than both Japan and India.

After being voted into power, the sitting government focused on lowering the distribution and transmission losses of both the Sui companies. The losses in SNGPL’s network were between 12 percent and 13 percent in 2013. These losses have now reduced to as low as seven percent. A loss of every single per centum in SNGPL’s network translates into Rs2.5 billion annually. The diminution in losses has contributed significantly to improving the efficiency of the LNG supply chain. Many international conglomerates –including Shell, Exxon-Mobil, Mitsubishi, Total and Engro Elengy – are vying to make significant investment in Pakistan for the development of LNG infrastructure on a private basis. Such investments will stimulate the economy.

The national importance of a cheaper and cleaner source of supply to steer the country out of the energy crisis is acknowledged by all the stakeholders. LNG, which was once a supplier’s market, is now a buyer’s market. Pakistan’s focus on the development of LNG infrastructure is the only viable solution for its medium-term energy security.

This article was published in the Opinions section of The News on August 9, 2017.